Tuesday, August 11, 2009

The Howard (economic) legacy

I have written a few times now about not over dramatising the idea of a Howard epoch. That said it is appropriate as Gerard Henderson did today to emphasise that our current strong economic position is due to the cumulative good government from Hawke through Keating to Howard. All of them pursued a strtegy of encouraging the operation of markets and choice while not vacating the field, and recognising the importance of national and personal security through institutions of defence, intelligence, the law and property rights.

It can even be argued that the "good" process began about half way through the Whitlam government - it is just hard to sort it out from the dross.* The Fraser Goverment was "mostl harmless" and while it didn't undertake much reform things like the first banking inquiry (was it Campbell) and the Davidson inquiry in telecommunications started the intellectual movement that saw fulfillment in financial deregulation and micro-economic reform.

However, we need to not over sell Howard's achivements. The Commonwealth budget is conceded t have bneen in a "structural deficit" since 2005. This really is unforgiveable. The theory of keeping the budget "balanced over the business cycle" ca be rephrased as "keeping the structural budget in balance so that deficits and surpluses represent the business cycle". If you are Keynseian you'd go further and say the budget should be in structural surplus in a boom so you can afford to go into structural deficit for stimulus.

So Joe Hockey was probably right to concede the point that in its last two years "the Howard government spent too much, taxed too little and presided over a system of middle class welfare." But he needs to make the point it was only the last two years - not the whole period of Government. This goes with recognising that for Howard labour market reform (aka breaking the unions) was the same as nationalising the banks for Chifley. It was such an article of faith that he pursued it after there was any further need (the business community was notable for its reluctance to really endorse work choices), and it was deeply unpopular and a major contribution to his failure at the polls.

* As a partial explanation of the Whitlam comment.
The issue that brought down Whitlam, the crazed plans of Rex Connor, was not in the end part of government policy. However, structural issues in the party meant that Whitlam was too slow to deal with his Minister operating outside his brief. The other big economic issues of the day were, like most in Australia, driven by external influences (the oil price rises). Any economic text will explain how the then standard theory responses to a supply shock were inappropriate. Whitlam lurched between policy responses that were mutually contradictory - but the first effective Trade Practices law and the tarriff cut were ultimately examples of what the texts now explain as the right response - actions to reduce regulation to enable the economy to readjust to the changed supply costs.

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